https://www.nst.com.

my/opinion/columnists/2022/11/854328/avoiding-conflict-interest

Avoiding conflict of interest

By Devanesan Evanson - November 24, 2022

A DIRECTOR owes a fiduciary duty to the company on whose board he sits.

The fiduciary duty of a director is threefold.

Firstly, there is a duty to act in the best interest of the company. Secondly,
there is a duty to avoid conflict of interest between personal and company
matters. And finally, there is a duty to refrain from any secret profit out of the
director position.

None of the above duties seems to address the question of whether being a
director in a competing company is a breach of the fiduciary duty. There
seems to be no explicit prohibition in law. As such, it is perhaps timely for
some regulatory requirements to address this issue explicitly for the
avoidance of doubt.

There are general principle-based practices to avoid conflicts of interest.

There are also listing requirements for conflict-of-interest situations to be
deliberated by the audit committee and to make recommendations to the
board.

For this to take place, the situation needs to be realised as a conflict-of-

interest situation. But what happens is that some audit committees do not
recognise this as a conflict of interest. Or some audit committees are not
notified to address this issue.

Here, the internal audit function, the assurance provider of governance,

controls and risk, can play their part and highlight the issue to the audit
committee for deliberation. The company secretaries can also advise the
chairman and the board to address such issues.

When a director is on the boards of competing companies, they must ensure

three things.

Firstly, they must ensure that they do not do, or purport to do, anything which
may adversely impact, or conflict with the interests of, either company.

Secondly, they must ensure that they act in good faith in the interest of each
principal (as though they were the only principal) without intending to
prejudice the other. Good faith requires the fiduciary to disclose the conflict of
interest, if any, and consequently obtain the informed consent of their
principals.

These are easier said than done. One is reminded of the parable of a servant
trying to serve two masters.

It states that "No one can serve two masters, for either he will hate the one
and love the other; or else he will be devoted to one and despise the other".

In the conflict-of-interest context, he will prefer one company to the detriment

of the other.

And thirdly, they must ensure that they make good any undue advantage
gained by them, or a related party (which would include a company on whose
board they serve).

These broad principles that a director must adhere to when acting on the
board of a competitor are fairly clear. However, they are difficult to implement
in practice. For example, while a director may maintain confidentiality
regarding the operations of one company, it is possible that they will apply
knowledge gained from their experience with the other company to make
decisions.

You cannot unknow what you already know. In fact, if you do not share what
you know, you may very well be breaching your fiduciary duty to act in the best
interest of the company in which you are sitting.

The counter argument for allowing directors to sit on the boards of competing
businesses is that they can bring their knowledge and experience in relation to
the business for the benefit of the company. But at what cost?

That knowledge and business would have been acquired while sitting as a
director on the board of a competing company. Surely, there is something not
so right in such a scenario. Surely it strikes at the heart of probity.

Additionally, situations may arise where an action taken by a particular

company and approved by its board will, by definition, adversely impact the
competitor on whose board the director serves (e.g., decisions on pricing,
strategy and marketing).

Policing potential conflicts that a director on the boards of two rival

companies may face is likely to be difficult to prove.

Given this and the fact that a director holds a position of probity that warrants
their wholehearted loyalty to the shareholders, a director should be prohibited
from acting on the board of a company that competes with a company on
whose board they already serve.

For a start, in the interest of good corporate governance, boards should

formulate a policy to cover such instances. The benefits of having a policy
that prohibits such competing director positions have its merits.

Otherwise, there may be a constant need to recuse oneself from a board

meeting as the discussion involves a conflict-of-interest situation which will
entail the conflicted director leaving the meeting for a while and rejoining later
several times during the meeting — hardly conducive for a cohesive and
efficient board meeting or for the effective contribution by the conflicted
director.

In fact, in such instances, the very contribution of the director to the board will
become questionable.